On Our Radar

On Our Radar

Tencent Faces Rising Costs to Grab Audience -- Heard on the Street

China's most valuable public company basically wants people to be glued to their smartphones. So far it is doing a great job, but to meet increased expectations, it needs to churn more money out from those screen addicts.

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Tencent, which owns China's biggest social network WeChat and is also the world's largest video-gaming company, had another stellar quarter. Revenue last quarter rose 55% from a year ago while net profit was up 58% -- both handily beat analysts' estimates. Mobile games were major drivers as sales grew 57% year-over-year.

More people are also using WeChat, a messaging app like WhatsApp that also lets people play games, transfer money, read news and gossip and buy things like movie tickets. Its monthly active user rose 23% year-over-year to 938 million. And Tencent managed to sell more ads to the app's users -- its social-related advertising revenue grew 67% last quarter.

The revenue boost, however, come with chunky costs. Spending on video content, especially for original online shows, depressed overall gross margins. Tencent has spent more to acquire its advertising revenue. Gross margin at its advertising segment was 35% last quarter versus 44% a year ago.

These seem like minor quibbles with revenue still growing at a breakneck pace. But Tencent's stock, up 37% this year, trades at 40 times this year's expected earnings. At some point, Tencent will need to turn all that screen time into cash.